What is Community development financial institution?

A community development financial institution or community development finance institution - abbreviated in both cases to CDFI - is a financial institution that provides credit and financial services to underserved markets and populations, primarily in the USA but also in the UK. A CDFI may be a community development bank, a community development credit union , a community development loan fund , a community development venture capital fund , a microenterprise development loan fund, or a community development corporation.

CDFIs are certified by the Community Development Financial Institutions Fund at the U.S. Department of the Treasury, which provides funds to CDFIs through a variety of programs. The CDFI Fund and the legal concept of CDFIs were established by the Riegle Community Development and Regulatory Improvement Act of 1994. Broadly speaking, a CDFI is defined as a financial institution that: has a primary mission of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a non-governmental entity.

The Housing and Economic Recovery Act of 2008 authorized CDFIs certified by the CDFI Fund to become members of the Federal Home Loan Banks. The Final Rule regarding the procedures and standards to be used by the Federal Home Loan Banks to evaluate applications for membership from CDFIs were published in the Federal Register Federal Housing Finance Agency in January 2010. The Final Rule is to be implemented by the 11 Federal Home Loan Banks, each of which will evaluate membership applications independently.

CDFIs are related to, but not identical with, Community Development Entities. CDEs are also certified by the CDFI Fund at the U.S. Department of Treasury but have somewhat different qualifications. Many CDFIs have also been certified as CDEs. The primary purpose of CDEs is to utilize the New Markets Tax Credit Program. NMTCs were created to induce equity investments in low-income communities. Traditionally, because of the NMTCs and the structure of the industry, investments in CDFIs were typically limited to larger financial institutions. Investment access to CDFIs appears to be on the rise, as CNote, a company that lets individuals invest their savings in CDFIs, recently received qualification from the Securities and Exchange Commission to offer their CDFI-based product to non-accredited investors.